Talking Wall Street Blues   

As recent events emphasize, money trumps ethics on the Street.

When I left journalism some 30 years ago to become an analyst of the newspaper industry for a Wall Street firm, the one thing that assuaged my regret about changing careers was the notion that I was leaving a business with somewhat squishy ethics for a business with rigid ethical rules.

Imagine my disappointment when I learned that as an analyst I was permitted to own shares in the very companies I was analyzing and writing supposedly objective reports about for clients. The obvious conflict of interest was my introduction to the ways of Wall Street.

What brings this to mind is the current controversy about--you guessed it--conflicts of interest in the work of analysts who touted stocks regardless of their worth in the interest of promoting their firms' pursuit of investment banking fees from--you guessed it--the very companies the analysts were writing about for clients.

Now, publicly owned newspaper companies and analysts who follow them have not been a target in any of these investigations. Instead the focus has been on the analysts covering dotcom companies. Yet newspaper companies have not escaped the impact of a Wall Street that increasingly has concentrated not on selling research to clients but on selling stocks. The focus has contributed mightily to the short-term orientation that now pervades Wall Street and that has pressured all companies to put short-term performance ahead of long-term interests of shareholders.

I never was one of those superstar analysts like Henry Blodgett, who raked in millions at Merrill Lynch during the dotcom mania, at least partly due to his ability to cozen the companies he followed into using Merrill Lynch for investment banking. Only once did I make Institutional Investor magazine's ranking of publishing analysts with an "honorable mention" (I figured I must have been doing something wrong).

Mainly what I did was tell how newspaper companies generally would perform in a given economic environment. I wrote about the adoption of new technology and how that was likely to affect profit margins and, most important for the long run, labor relations. I explored the ups and downs of the volatile newsprint market.

I never issued buy, sell or hold recommendations, believing that my clients were smart enough to make their own decisions.

Occasionally I might point out, for example, that Media General, in addition to its newspapers and television stations, owned a cable-television system in northern Virginia that could be sold for more than the entire stock-market valuation of the company (Media General later sold the system for more than its stock valuation). I would give my opinion of break-up values of companies--what each company's operations would fetch if sold outright--and compare that with total stock-market value. Normally there is a gap, say 20 to 30 percent, because traded stock represents minority interests. A gap greater than that suggests an investment opportunity.

Gradually, though, investors lost interest in the research I was doing, having become enamored of the short-term orientation of most Wall Street analysts (having portfolio managers' compensation based partly on quarterly performance contributed to this). In effect, institutions were saying: Don't tell me how these companies will do a year or five years from now. Tell me what's going to happen to the stock price next quarter. It had become time for me to withdraw, and eventually I did.

That initial introduction of mine to Wall Street's stance toward conflicts of interest seems pretty minor now, compared with what went on during the 1990s. Big Wall Street firms have long claimed that there is a "firewall" between research and investment banking. As we have learned recently, that wall was so porous as to be nonexistent.

Merrill Lynch, the initial target of investigations, has agreed to pay $100 million in penalties to resolve charges of conflicts of interest brought by New York's attorney general. Without admitting wrongdoing, the company apologized "for the inappropriate communications brought to light," referring to e-mail messages in which analysts disparaged stocks they were publicly recommending. This almost suggests that what the company regretted most was not the disparity between the messages and the recommendations but that anybody found out about it. Merrill has vowed to reorganize its research department and to no longer allow investment banking help to determine analysts' pay. Other firms are expected to follow suit.

Will this really change things? The fundamental conflict of interest is still there, and if the past is a guide, in the long run what will be moral behavior on Wall Street will be what makes money.